QDI…eh? And Other Signs It’s Time to Talk…

Retirement Plan Topics for 2014

When it comes to a retirement plan, there is no shortage of topics to discuss with a plan sponsor. In this article, we highlight nine key issues which present planning and consulting opportunities with current clients and prospects alike:

1. Document update. Beginning in 2014, the Internal Revenue Service requires that all defined contribution plans be rewritten to encompass provisions of the Pension Protection Act of 2006 (PPA ’06). This mandate, called PPA restatement, presents an opportunity for plan design review to ensure that it continues to be aligned with objectives of the business. Examples of possible enhancements include changes to eligibility provisions, vesting schedules, matching and/or profit-sharing allocation formulas and conditions, withdrawal terms, realignment of plan fees (paid by plan sponsor v. plan participant), and more. Avoid ‘push-of-a-button’ restatement approach where a new document is provided without a thorough review; while it may come at a low fee, cost of missed opportunities down the road may be significant. Ask: What are the primary goals of the plan? Does your retirement plan currently align with your business objectives and personal financial goals? Are you satisfied with the way your plan runs? If you could improve anything about your plan, what would it be?

2. Change in objectives. When a plan is designed, especially in a small business context, it typically takes into account the objectives, considerations, and factors known at that time; the extent of flexibility, to factor in possible departures from those dynamics, is a mark of solid plan and investment offering. Yet, even with the flexibilities afforded by a well-crafted document, it is important to periodically take a new snapshot of business goals, gauge their impact on plan design, and take appropriate action. Ask: Is there a way to reach current objectives with a more efficient design? Is there an opportunity to increase employee participation and deferral rates, thus helping improve participant outcomes, without a significant impact on costs of employer match? As participant population changes, is the investment lineup flexible to accommodate their priorities and needs? If the contribution objective is now higher, can the existing plan support it; or -if- lower- does the plan accommodate the change without unnecessary costs?

3. Business cycles. Business cycles play a significant role in driving plan selection and evolution of plan design over time. Plans established by start-ups will typically set parameters which will differ from a plan maintained by a mature firm. As these organizations progress, it is important to review possible impact on their retirement programs. Acquisitions, mergers, addition of business partners, growth and expansions need to be carefully considered before their effective dates to keep all planning options on the table and achieve optimal results. When meeting with a plan sponsor or an employer considering a retirement program, inquire about any contemplated changes to business structure, ownership, or growth. Ask: Are you considering changes to the structure of the business or its ownership? Are you planning on reinvesting some of the profits back into the business in near future?

4. Staff changes. This dynamic is more frequently felt and experienced in a micro plan space, where plan design can be fairly complex and closely tied to employee demographics. For example, in a combined 401(k) Profit Sharing/ Cash Balance Plan for a professional corporation aiming to benefit select groups of employees based on their role, new hires and/or employee terminations may require modifications to plan structure to keep it in line with the sponsor’s original intent. But don’t forget about impact of personnel changes on a large plan: reductions in workforce, expansions, use of leased or seasonal employees bring a different set of issues to consider. A pro-active check-up for such changes will save you and your client a lot of potential headaches and costs down the road. Ask: Are you planning on increasing or reducing your staff? Are you contemplating adding new key employees? Are you anticipating expanding the business? Are you using services of leased or seasonal employees?

5. Missed or late deferrals and loan repayments. When it comes to a 401(k) plan, by far, the most frequent employer failures center on forgetting to timely notify eligible employees of their right to participate in the plan or timely transmit their salary deferrals and loan repayments. While there are special Internal Revenue Service and Department of Labor programs to fix these mistakes, corrective contributions, compliance fees to these agencies, and professional services may come at a significant cost. Understanding of plan eligibility conditions, entry dates, enrollment process, and deposit timing rules will help avert or mitigate these costly errors. Ask: Do you understand plan eligibility and entry conditions? Is there a method to identify eligible employees and timely communicate to them their benefits and rights under the plan? Is there a process to assure timely deposit of deferrals and loan repayments to participant accounts?

6. The five-year clock. While set-it-and-forget-in approach may be appropriate for some aspects of a retirement program, like encouraging plan participants to pick a deferral level with an automatic increase to expert-recommended level of savings, it may be detrimental to other areas. Failure to periodically review investment platform contract is one of them. With the pace of changes to the structure and level of fees the retirement industry experienced over the last few, it is important to make sure the record keeper contracts are reviewed at least every five years. The review should aim not only to evaluate the fees in the context industry demands but also ensure that changes in plan assets, average balances, deferral rates, net flows, and possible service needs and delivery are appropriately reflected in the fees paid to providers. Ask: What the fees are paid for the plan? How are they structured and paid? Is there revenue sharing, where does it go, and how is it disclosed?

7. Fee disclosure documentation. July 2012 brought a new set of requirements to plan providers and sponsors around communication of fees and their periodic review. Providers are tasked with timely disclose of fees to plan sponsors. Plan sponsors are charged with periodic evaluation of those fees for reasonableness and informing plan participants and beneficiaries of fees that are charged or that may be charged to their accounts. It is important that plan sponsors periodically receive fee disclosure documents, benchmark those fees, and document that process. Ask: What are the service needs of the plan (e.g. compliance testing, participant website, Form 5500 preparation, on-site meetings, enrollment support)? What are the basic and value-added services received and needed? How do these services benefit plan participants? Is the provider qualified to deliver these services? How is the quality of services received? What are the fees? How do these fees compare to fees of other providers?

8. QDI… eh? Plan fiduciaries bear responsibility for selection and monitoring of plan investments. It is no surprise that careful review and monitoring of investment options in the plan remains one of the most frequently discussed topics. But what if even with the best-of-breed line-up a participant does not make an investment election? Is the plan sponsor still responsible for that participant’s investment outcome? Possibly. That’s where a qualified default investment alternative (QDIA) comes into play. Unfortunately, many plan sponsors are still not aware of this important plan feature. Why a plan should consider a QDIA? The Department of Labor provides a special exemption, a safe harbor, to plan sponsors for investing contributions of participants who either did not make an investment election or were enrolled automatically. When the funds are placed into a QDIA, sponsors are able to reduce their liability exposure. There are three kinds of QDIAs designated by the DOL: target date funds, lifestyle funds, and managed accounts. Participants are typically invested in a target date based on their age; they are also given an opportunity to reallocate their contributions using investment options available in the plan. Ask: Does the plan use QDIA? What type of QDIA is used in the plan? What type of monitoring and selection process is used for plan QDIA? Are participants notified when their investments are placed into a QDIA?

9. Shouldering all the weight. Today, especially in the small plan category, plan sponsors frequently shoulder the entire burden for selection and monitoring of investment options offered under the plan. Sometimes, it is intentional, but typically that responsibility is carried without full awareness. It is important to educate plan fiduciaries of their responsibilities and options to delegate some of that responsibility to an investment advisor or investment manager. Many providers offer services of ERISA Section 3(21) fiduciary and/or ERISA Section 3(38) fiduciary who help plan sponsors (and advisors who use those services to scale and provide better leverage to their business) to shoulder some of the fiduciary responsibility for plan investments. A 3(21) fiduciary assists in selection and monitoring of plan investments; plan sponsor approves 3(21) fiduciary’s recommendations and gives a green light for their implementation. This model has been described as ‘do it with me.’ A 3(38) fiduciary, on the other hand, assumes full discretion over plan-level or participant-level investment decisions; plan sponsor does not get involved investment decisions since that responsibility is delegated to the 3(38) fiduciary. This model has been described as ‘do it for me.’ It’s important to note that while these services may help mitigate risk, it is a plan fiduciary’s responsibility to prudently select and monitor these service providers and their services. Ask: Who is currently responsible for selection and monitoring of plan investments? Have services of a 3(21) or 3(38) fiduciary been explored as an option? If fiduciary services are utilized, is there a process to review and document their performance and fees?

First Allied Retirement Services developed a variety of tools, reports, and materials to assist you in effective communication about these and other important qualified retirement plan topics. The rules are complex and to succeed you need to either become an expert or align yourself with the right partner.

%d bloggers like this: